MannKind Ripe for Profit-Taking After Afrezza Approval

By

Dimitra DeFotis

July 1, 2014

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Diabetes patients can breathe easier.

The U.S. Food and Drug Administration early Friday approved an inhaled insulin called Afrezza, which frees the drug's manufacturer, MannKind (ticker:
MNKD
), to seek a commercial partner. Afrezza works with the two main types of diabetes, which affects about 29 million Americans, roughly a quarter of whom are treated with insulin.

MannKind stock swung sharply during Friday trading before closing down 5.5%. Investors, who have seen shares skyrocket since April, could hardly be blamed for taking money off the table on a cash-burning profitless company. We'd do the same.

Despite the good news, the FDA ordered crucial studies -- and more trials -- to determine long-term cancer, heart and infection risks and if children can use the drug. So MannKind needs a partner fast to launch the drug in early 2015 as hoped.

But attracting a partner will be tricky, especially as MannKind needs one that will facilitate low-cost financing. Moreover, significant risks for the drug remain, and marketing may be more complex than generally thought. Afrezza, for instance, is not suitable for smokers or people with lung ailments.

MLV analyst Graig C. Suvannavejh bases his target on the present value of future cash flows, the first meaningful revenue expected next year and a conservative profit growth rate of 10%.

"In light of the stock's 175% move since early April, we see little reason to move estimates and/or our price target higher on the approval itself," writes Suvannavejh. "We remain optimistic that a high quality partner will sign on, but the proof will be in the pudding."

Suvannavejh says MannKind CEO Al Mann claimed over lunch at a conference in mid-June "that he was already in possession of multiple term sheets" for partners who can help bring the drug to market. Now, more are likely to come.

Of course, Afrezza could grab significant share in the diabetes market. Keith Markey, an analyst at Griffin Securities, sees positives in the FDA decision. By seeking further studies of the drug's impact on children, "the request suggests the FDA thinks the drug will be widely used by pediatric patients and it must be fairly comfortable with the drug's safety profile," writes Markey, who has a Buy rating and a $15 price target.

Moreover with nearly 30% of MannKind's float held by short-sellers, the stock could spring skyward if a rally triggered widespread short-covering.

However, it appears that the easy money has been made. Why get greedy?

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